Not many large companies double their number of employees in three years without going through a merger or acquisition. But that's exactly what Genentech, one of the world's leading biotechnology firms, has done, going from approximately 5,000 staff at the beginning of 2003 to over 10,000 now. During the same period it has also doubled its revenues (from $3.3 billion to $6.6 billion), its product sales and its earnings per share.
Not surprisingly, the company has won many plaudits, both from within its industry and the business world at large. Last year it was voted top employer in the US by the magazines Science and The Scientist; and in January, the company - which recently celebrated its 30th anniversary - was ranked number one on Fortune's 2006 list of 100 Best Companies to Work For, on the basis of a distinctive culture that emphasises innovation and fun.
Genentech's head of global procurement is Clive Heal, a Briton who joined in October 2003 from the UK financial services giant Prudential. CPO Agenda sat down with him recently at the company's sprawling campus near San Francisco's international airport.
How would you describe Genentech's culture to an outsider?
There are a number of factors about our culture. First, we have a very strong commitment to our patients. As you go around our campus you will see pictures of patients up everywhere. Patients also come in and talk to us on a regular basis about how we've extended their lives and improved the quality of them.
That motivates a lot of people here, including me. I wake up in the morning really enthusiastic about coming to work. I was at our national sales meeting in January and some patients came on to the stage and talked about how our products had helped them. It was unbelievable; like hundreds of other employees I was in tears. It was so moving but also motivating, because you realise that we're actually changing people's lives.
Second, we are really focused on the science. We have some excellent scientists and they have been very successful at bringing molecules and new products forwards. That success spreads throughout the business, because everybody feels that we are on a mission, that we are addressing unmet medical needs and that we have a strong pipeline of products.
Third, it's a great place to work. It's relatively informal, it's not hierarchical. I've heard the phrase "casual intensity" used before to describe it. On the one hand it appears laid back, but on the other hand people work very, very hard at Genentech, because they want the company to be successful. Everybody here feels part of the company; there's no difference between us. It's a team-based organisation where everybody is valued for their input and we have a lot of fun. Quality of life is important for people working here.
Cynics might say that's just dressing for what is, in reality, hard-nosed American business. What do you say to that?
I've worked in other pharmaceutical organisations that are very focused on revenues and profitability. Genentech really works on what's best for patients. What's going to have the biggest impact in the marketplace, in terms of the number of patients we can treat and the quality improvement in life we can give them? That is the thinking that really drives a lot of the decision-making. Clearly we are responsible to our stockholders as well, so we are looking to drive revenues and profitability, and we've been really successful at doing that over the past few years. But that's based on trying to do what's best for patients.
A culture that emphasises "a minimum of guidelines and procedures" - as Genentech's does - sounds, on the face of it, a nightmare for procurement. Is it?
Genentech has limited policies, rules or guidelines, although those are starting to become more important because we are at a size where, in order to function, we need to have some of those in place. For example, we recently developed a company-wide travel and expenses policy. We do have good operating principles, which are related to financial control, because clearly that is important to us and there's Sarbanes-Oxley that we need to work within.
But it's important when we're devising policies to make sure they support the company culture as well. The culture shouldn't be an excuse not to have a policy if one is required, but we also want to give people as much freedom and flexibility as we can. Our company is all about innovation and change, so in a way you don't want to constrain that by having lots of rules and regulations and policies. Where it's appropriate we have them, where it's not we don't.
Within procurement, clearly we have defined processes. Last year we implemented an SAP system and that has radically changed the transactional processing activity across the company. Prior to that we had 24 different ways of ordering and paying for goods and services. Putting in the ERP system did mean a lot of standardisation and that's been a challenge. It did take away some freedom to act, in terms of how people were previously able to order and pay for things.
One of our goals is to ensure that our processes are clearly defined and that the stakeholders that we work with use them. At the moment we are at the point where we are deploying procurement differently in different business areas in terms of what is most appropriate for them. Our longer-term goal is to have standardised processes right across the business, but at the moment we do allow some flexibility in order to keep with the pace of the business.
The culture may seem like a challenge for procurement, but in a way it's enabled us to have more freedom, in terms of the way we want to go about doing things.
I guess many people would imagine that you would have a lot of maverick buying in such an environment. Is that the case?
I believe that the vast majority of people in Genentech do what they feel is best for the company. So we can tackle that in one of two ways: either we can come in at the one end and talk about compliance in a policeman role; or we can try to go the other way, which is through collaboration.
Our approach is to engage the stakeholders and get their buy-in, and make sure right from the start we really understand the business needs and have agreement on what those are, work with them on sharing supply market information, and collaboratively develop options together so that the strategy we come up with is cross-functional in nature.
Does that approach apply equally to low-value, non-strategic spend and more critical, strategic spend?
When I joined we had just over 10,000 suppliers. Last year we reduced that down to 5,000 suppliers and our goal is to get down to 2,000 suppliers. In my experience, if you try to reduce the tail of suppliers by stopping them or blocking them, or trying to delist them, as fast as you are killing off those suppliers new suppliers are being added. Our approach is not to try to remove the tail, but to focus on the bulk of the business at the front end where most of the dollars are spent, and work with our colleagues in the company to develop an agreement on where the business should go. Then by definition we find that the tail drops off.
We focus very much on the key spend areas for our company. Our biggest spend is in the engineering, construction and capital equipment area. Because we are growing so fast, we are investing in a new manufacturing plant that we're building in Vacaville, in northern California, but also the growth of the company means that we need more and more equipment and greater capacity. We require more and more buildings for our employees, so it's a big area of cost for us at the moment.
The company's values refer to people who have "a flexible, entrepreneurial spirit". To what extent is that reflected in the procurement function?
I like to think it is. This is really, for me, where the innovation comes in. If you continue to do the same things in procurement you'll get pretty much the same results. I believe the role of procurement is to create and deliver value, and the creation comes from getting innovation in the sourcing strategy. That's where procurement people can really think out of the box.
When we're able to develop innovative potential ideas for evaluation, which nobody's thought of before, which really go beyond the boundaries - and we've done that in quite a number of our sourcing strategies - that's where that creativity, that flexible, entrepreneurial spirit comes in and is useful.
What are you looking for in the people you bring into procurement? And how easy are you finding it to get hold of the right people?
We're finding recruitment a challenge. The cultural fit is important to us. We are looking for people who have not just traditional procurement skills and competencies, but also who can build the right sort of relationships with suppliers and stakeholders; people who really challenge the status quo and think outside the box; people who can lead cross-functional teams; people with passion and drive and a sense of urgency as well; people who are comfortable in an environment where innovation and change happens all the time. Genentech was one of the fastest-growing companies in America last year and that has a pace about it that our people need to be able to keep up with.
Surely there are lots of bright people in America, lots of people with MBAs. Why would you have a recruitment problem?
We do see a lot of people with MBAs. And the level of MBAs in America is much higher than in Europe. It would be very easy for us to specify only MBA candidates need apply for Genentech procurement. I think the challenge is to find people who can really operate at the strategic level.
Are you looking abroad for people now then?
Initially we were looking in just the California area, but we've recruited people from right across the US. We're probably now at the point now where we are going to have to start looking further afield. But we're also getting a lot of people from other functional areas within the company applying to join procurement, and last year we had two people join who had no procurement experience, one of whom was a scientist working in the research organisation. They've been really successful and valuable members of our team.
R&D, let alone scientific R&D, has not traditionally been an area where procurement has been either welcomed or active. Is hiring scientists the answer?
We recruited two people with scientific PhDs last year, one internally and one from outside who has a procurement background. It's a specialist area, very similar to marketing and IT. In order to be successful in any of those areas you've got to have specialist knowledge, be able to talk the right language.
The research area and the development area have differing business needs in terms of what they're looking for. In development we're focusing very much on supporting supplier relationship management. In research, it's a lot more about the process that people use to get the goods and services that they need to do their experiments. It's also how do we make sure we're starting to think about the future manufacturing need, when those raw materials go through the trials process and into the final product.
We need to keep working on this to get further up the research pipeline, so we can help support and get more commercial thinking into the early research stages. We have a project that is trying to do that right now.
Genentech is a company that's very clearly in growth mode at the moment. To what extent is it focused on costs, and how important for procurement is reducing costs?
Cost savings are important to any business, but in Genentech's case our commitment is to deliver the value that's defined in our sourcing strategies. Clearly sourcing strategies can, and do, have cost saving goals in them. It's a balance between managing costs and growing the business.
Our stakeholders are increasingly becoming focused on managing costs and we try to work with them on that. I do see our role as ensuring that costs are visible, and managing costs where we can, but I want to make sure we are helping with security of supply, managing risks, and helping to bring innovation to our company. I think the value procurement brings has to go beyond costs. If we're only focused on costs then it's a blinkered perspective.
To what extent do you think procurement can contribute directly to innovation - which is clearly this company's lifeblood - and to revenue growth?
I certainly don't believe that in the future we should be constrained to just the third-party expenditure. We have an opportunity to look at value creation right through the business.
First of all, obviously getting our arms around the third-party expenditure, but then moving up the value creation ladder, by looking at business process cost. One of the initiatives we ran last year was focused not only on the cost elements, but also how we could improve the business process to make it faster and much more efficient. I believe there are opportunities for procurement to support revenue generation - not from suppliers, but helping the business to grow at the top end. That moves us beyond the term "procurement", which in itself is a constraint and will need to change.
I really see procurement dramatically changing in the future. If I think back to the past 10 years, what I've seen is everybody doing the same sort of thing in terms of category and supplier management, putting in ERP systems, and so on. Really the only variable is how far along that maturity curve they've got and their success in implementing the different initiatives. But I'm disappointed at how within our profession we're not really pushing the boundaries about where we want to go.
Procurement teams could also become the risk managers of the business; take risk management to a new level. It's something we've worked on over the last couple of years here in terms of really understanding what is supply risk and how we can put in new tools and techniques to better manage it. We needed that to help our growth.
I also see procurement, in some companies, could take on the role of asset manager for the business. We buy the assets, what if we became the owners of those assets and accountable for them? Outsourcing and offshoring is another area where procurement could play a greater role. And there's even been discussion about merging sales and procurement functions together. At first glance you might think it's counter-intuitive, but really we're playing the same game, we're just on opposite sides of the chessboard. I know of a couple of organisations - one in the US and one globally - where procurement is actively involved in sales proposals and is physically out there helping to drive sales.
I think technology will provide us with a lot of new opportunities as well. We're working hard on "touch-free" processing, to make the whole purchasing process as automated as possible. We're setting criteria for no buyer intervention for the other shopping cart requisitions, because I think it's important in terms of where we put our resources and where we can really add value.
I also feel that in the future we will have electronic sourcing much more than we have now. In stationery, for example, which is a low-spend area for us, I want our system to know what we need from a contract and what criteria are we looking for in supplier selection. I want it to go out on the internet and bid for our business, select a supplier, contract with them and for a new supplier to turn up at 7am the next morning without any procurement intervention at all. Without anybody's intervention.
Does that sort of software exist today?
I don't know, but I think it's an example where procurement people should be pushing for what we want from the IT industry, rather than waiting, as we did with e-auctions, for somebody to come to us with a technology. There was a tremendous reluctance in our profession even to embrace it. Even now not all companies have embraced e-auction technology. We weren't the driving force, it came to us and eventually we picked it up.
I'd like to see us thinking much more about where we want to go as a profession in the future. There are different ways we could deliver value, whether it's business process cost, revenue generation or even reducing corporate taxation levels. The challenge for CPOs is going to be deciding which pathway to take. Theoretically we should continue to be given additional resources in procurement until the investment opportunity is greater somewhere else in the business, at which point those resources get moved.
The reality is that probably very few procurement organisations are given the true number of people and dollars that they really need to optimise the value they can deliver. With limited resources we're not going to be able to do all of these things at the same time, so CPOs will have to make a call in terms of am I going to spend my time on technology - bringing efficiencies and integration in the supply chain - or am I going to focus more on the role of procurement in terms of risk and asset management, global aggregation, and so on? I think that will drive procurement becoming a competitive differentiator.
If I were to come back in three years, what would success look like for procurement?
I would like to think we'll have moved beyond the third-party spend; that we have sourcing strategies in place for 70 per cent of our spend; that we have a smaller, more global and more aligned supply base that views us as a preferred customer, gives us priority status and brings innovation to us.
I'd like us to be influencing the business at an executive level more than we do now, both in terms of flagging up opportunities but also making sure that we're managing the risk and helping to grow the business; that we're seen as true partners by all of our key stakeholders; that we use technology to automate even more processes. In terms of our team, I'd certainly like to see us with a 75:25 strategic:transactional ratio.
So I think there is a lot of opportunity for procurement to really add value to Genentech and to help us meet our 2010 goals (see Fact File, page 43). I think there are exciting times ahead for procurement.
Factfile: Genentech at a glance
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Founded in 1976 by venture capitalist Robert Swanson and biochemist Dr Herbert Boyer
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10,000+ full-time employees, over 20% of whom have advanced degrees such as PhDs
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Revenues of $6.6 billion in 2005 (19% spent on R&D)
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Majority owned by Roche of Switzerland
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Headquartered in South San Francisco, with manufacturing plants in South San Francisco, Vacaville and Oceanside, California, and Porri-o, Spain
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Chairman and CEO: Arthur D. Levinson, PhD
Biooncology products
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Avastin (colorectal cancer)
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Herceptin (breast cancer)
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Rituxan (non-HodgkinÕs lymphoma)
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Tarceva (lung/pancreatic cancer)
Horizon 2010 goals
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To bring at least 20 new molecules into clinical development
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To bring at least 15 major new products or indications on to the market
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To become the number one US oncology company in sales
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To achieve an average compound annual non-GAAP earnings per share growth of 25%
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To achieve cumulative free cash flow of $12 billion
Procurement
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64 FTE staff plus temps (up from 32 in 2003)
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Reports into the CFO, David Ebersman
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$2.4 billion spend in 2006
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Involved in 75% of spend (50% actively managed)
Interview by Geraint John
